U.K. GDP Data Should Be Treated With Caution

The U.K. fourth quarter GDP numbers are obviously a huge shock and will no doubt trigger a political row. But from the market’s perspective, a couple of immediate points stand out.

First, U.K. rate increases are now almost certainly off the agenda until May when the Bank of England releases its next Inflation Report. This was exactly what the doves on the Monetary Policy Committee needed to justify their view that the recovery is too weak and uncertain to risk raising rates above 0.5%. That’s inevitably had an impact on sterling, which fell on the news.

The second point is that this number is bound to be revised upward. The first estimate of U.K. GDP numbers is notoriously unreliable — so much so that it last year prompted a huge debate in the City, with Goldman Sachs arguing robustly, and it turned out rightly, that first estimates of GDP contained no useful information. The Office for National Statistics admits this estimate is based on very limited data for December when heavy snow caused chaos in the economy. In other words, literally a guess.

Oops. This was not what was supposed to happen. The consensus was that the U.K.’s fourth-quarter GDP data would show the economy to have grown by 0.4% in the three months to the end of December. For Prime Minister Gordon Brown, this was supposed to be a long overdue moment for celebration, marking the end of the longest recession in post-war British history and providing a backdrop to his reelection campaign this spring. Across London at the Bank of England, the official data was expected to provide the final piece of reassurance that it was safe to call time on quantitative easing.

Well, the recession may have ended but the data suggests it was a close-run thing. Fourth quarter growth was just 0.1%, pointing to an overall contraction in 2009 of 4.8%, the steepest one-year decline on record. A debate will now ensue over how much credibility to attach to the official data, which is anyway only an initial estimate. Goldman Sachs described the previous third quarter GDP release showing a 0.4% decline in growth—subsequently revised to a 0.2% decline—as “literally unbelievable”. The U.S. investment bank notes that U.K. GDP first estimates have a very poor track record and invariably end up being substantially revised both upwards and downwards. It argues that private sector survey data has a far better track record at predicting actual GDP outcomes.

That 2009 fourth quarter GDP number was subsequently revised upwards to 0.5%. I will be amazed if this current GDP estimate, which is similarly at odds with recent survey data indicating growth is likely to have slowed in the fourth quarter but was still positive, won’t be similarly revised.

Comments (1 of 1)

Rate rises are off (the Agenda) for longer than May. Although these numbers do not reflect the accurate position
the recovery is slow and erratic and the BOE will not risk a rate rise until year end at the earliest.